Assuring Accurate Appraisals, Part II: What's a consumer to do?

May 1, 12:04 PMReal Estate News ExaminerBroderick Perkins

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An appraisal of a home is always supposed to be a fair, impartial and professional evaluation of a property's true value and not under pressure from special interests.

The risk-management tool is designed to assure the owner gets a fair price, the buyer pays the right price and the lender's risk in making the loan is commensurate with the property's true value.

Unfortunately, during the height of the housing boom, appraisers were pressured to up the value of homes. Now, during the housing downturn, appraisers are being pressured to lower the value of homes.

Assuring Accurate Appraisals, Part I: Perennial pressure on appraisers bad for business, housing, consumers

Either way, consumers, both buyers and sellers, are caught in the middle.

"It's an ever-changing pendulum," says Jim Amorin, president of the Appraisal Institute.

No longer arrived at by using a simple drive-by inspection, computerized automated valuation model (AVM) or even just comparative analyses of similar properties, appraisals have become yet another sticking point along the already viscous road to home ownership.

"Everyone got seduced by double digit property value increases and never thought the bottom would come. Doing an appraisal today is a complex deal with foreclosure sales, short sales and fewer sales. You want to get the most experienced folks doing appraisals," Amorin added.

So, through all the muck, how can consumers be sure the appraiser's work is on the up and up?

It's not easy, but here's how.

When the appraisal choice is yours or if you are the seller, demand the lender use only local, licensed and certified appraisers with trade group designations. Seek referrals from family, friends, co-workers or others you trust who've recently enjoyed satisfactory work from an appraiser.

Even if the choice isn't yours, you can ask the lender, or get your real estate agent to ask the lender for the appraiser's credentials.

"The buyer can ask how the appraisal was done, but you need to speak to the lender about the appraisal if you have any questions," said Ted Faravelli, Jr. an expert witness, forensic real estate analyst and executive director of the California Association of Real Estate Appraisers.

First, a local appraiser is much more familiar with local market and property conditions than outsiders.

In California, for example, the state Office of Real Estate Appraisers licenses and certifies appraisers. Appraisers must be licensed before reaching certification. Licensed appraisers can appraise residential properties with a value of up to $1 million. Licensed appraisers with certification have as much as twice the education -- the equivalent of an associate or bachelors degree -- and can appraise any residential property no matter the value. At the highest level of certification, an appraiser can appraise any type of property, residential or commercial.

Affiliation with the Appraisal Institute or other trade group is also key. Institute members typically work beyond state licensing and certification requirements to earn a Senior Residential Appraiser (SAR) designation just as real estate agents work beyond state licensing requirements to achieve designations based on greater education and experience.

"SARs are much more experienced. They have more education and they are held to a higher code of ethics than state licensing. If you hire one, you'll get a true estimate of a home," says Amorin.

The Appraisal Institute is comprised solely of real estate appraisers, but the American Society of Appraisers, which includes members from all appraisal disciplines, likewise grants accredited member real estate appraisers designations based on achievements that go beyond state requirements.

Local work, an unblemished license, certification and designations are good indications of an experienced and ethical appraiser, but not a blanket guarantee.

• Determine how much of the appraiser's work is done for lenders. A high number could mean the appraiser is just returning predetermined values the lender wants, rather than true market values. If all of an appraiser's work is done for a lender and the appraiser tells you he or she never comes in with a value that is lower or higher than the sales price, find another appraiser, whenever possible.

• Consider appraisers who also do estate and trust work because they are under pressure to be accurate -- not high or low. Another indication of quality is forensic or litigation work. Ask the appraiser how he or she helps litigants. The answer should be that he or she is an advocate for market value, not the litigant. Appraisers are legally required to be impartial.

• Buyers and sellers can ask their real estate agent to see a copy of the appraisal before the deal closes.

"Ask to get it in ample time to look it over. The first page has the factual information about the property, location, physical description, etc. The second page is where the value analysis takes place," said Amorin.

If the appraisal was a drive-buy or automatic valuation model-generated (AVM) some assumptions could have been made about the property and its description. If you know from your own ownership or inspection of the property that the information is inaccurate, tell the lender.

"Every borrower is entitled to a copy of the appraisal and they need to make sure they get it. A lot of them never do. You need to ask for it and you need to read it. If there's anything in there that you take exception to, you need to bring it to the attention of lenders," said Faravelli.

• Home buyers should also make sure to leave their financing contingencies in place until the lender has signed off on the appraisal. That makes financing contingent upon the buyer's approval of the appraisal.

Assuring Accurate Appraisals, Part I: Perennial pressure on appraisers bad for business, housing, consumers